TaxTMI 
TaxTMI 
2015 (4) TMI 258
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....vour of the Revenue and against the assessee by the decision of the coordinate bench of this Tribunal in assessee's own case for assessment year 2003-04 rendered vide order dated 23.7.2009 passed in ITA No.662/Hyd/2006 and others wherein it was held by following the decision of Hon'ble Delhi High Court in the case of CIT V/s. Shriram Honda Power Equipment Ltd. (289 ITR 475), that interest income received on deposits was chargeable to tax in the hands of the assessee under the head 'income from other sources' and the same, therefore, was liable to be excluded from the profits of the business for the purpose of computing the deduction under S.80HHC allowable to the assessee. As the issue involved in the year under consideration as well as all the material facts relevant thereto are admittedly similar to that of assessment year 2003-04, we respectfully follow the order of the coordinate bench for the assessment year 2003-04 and uphold the impugned order of the learned CIT(A), confirming the action of the Assessing Officer in excluding the interest income on fixed deposits from the profits of the business for the purposes of computing the deduction allowable to the assessee under S....
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....e is a company which is engaged in the business of manufacturing and trading of packaging material. The return of income for the year under consideration was filed by it on 30.10.2004 declaring total income of Rs. 40,19,33,216. As noted by the Assessing Officer during the course of assessment proceedings, international transactions were entered into by the assessee company with its AE involving inter-alia export of finished goods amounting to Rs. 9,22,35,092. A reference, therefore, was made by him to the Transfer Pricing Officer(TPO) under S.92CA(1) of the Act, to determine the Arm's Length Price (ALP ) of these international transactions as well as other international transactions entered into by the assessee company with its AE. In the Transfer Pricing Study report furnished by the assessee, the bench marking of the international transaction was done by following the Transactions Net Margin Method (TNMM) taking Net Profit over Sales as Profit Level Indicator (PLI). The relevant data pertaining to the financial years 2001-02, 2002-03 and 2003-04 was used and 19 Indian companies engaged in the manufacture of packaging material, i.e. steel strapping, were identified as comparables.....
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....his regard, the objection raised by the assessee that the margins on account of domestic and export sale should not be compared as the price charged in domestic market was different from the export market on account of various factors was not found sustainable by the TPO. He held by relying on the OECD guidelines on Transfer Pricing that the internal comparables i.e. manufacturing domestic segment of the assessee was the preferable and most suitable comparable to the manufactured export segment to AE and accordingly applying the Net Profit to Cost ratio of 21.10% of the domestic manufacturing segment of the assessee company to the cost of export of manufactured goods amounting to Rs. 9,41,51,979, he determined the Arm's Length Price of the international transactions of the assessee with its AE involving export of manufactured goods of Rs. 11,40,89,046 as against Rs. 8,94,19,590 charged by the assessee. The difference of Rs. 2,45,98,456 accordingly was worked out by the TPO as transfer pricing adjustment, which is required to be made in respect of international transaction of the assessee company with its AE involving export of manufactured goods. 11. The alternative contention o....
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....ng profits. 2. TPO erred in adopting the profit level indicator as net profit on cost instead of net profit on sales adopted by the assessee. 3. TPO erred in rejecting the external comparables selected by the assessee by using the data of earlier years. Since the data of the previous year relevant to AY 04-05 was not available at the time of preparing TP documents, the appellant rightly used the data of earlier: years. 4. TPO erred in holding that the domestic sales were the best internal comparables for determining the ALP. The exportisales were necessitated due to unutilized production capacity and therefore the appellant had to export part of its production at whatever price it got, in order to recover its cost and to increase the profitability. 5. The TPO erred in comparing the non AE export made to Sudan only. The finished goods exported to Sudan were of different quality and were not usually manufactured and sold by the assessee. It was an exceptional transaction undertaken at a substantially high price of $1250 per MT against the usual sale price, of $641.44 per MT. TPO also erred in considering the commission @ 12.5% while the actual commission paid in this tran....
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....red to be made as per this alternative analysis was worked out by the learned CIT(A) at Rs. 1,28,14,302. Since the TP adjustment worked out by him as per the main method followed was at Rs. 1,02,47,642, after some adjustments, the learned CIT(A) held that the alternative analysis merely support the quantum of TP adjustment made as per the first method. 15. The learned counsel for the assessee submitted that TNMM was taken as the most appropriate method in the TP study report furnished by the assessee and entity level net profit to sale was taken as Price Level Indicator, which were compared with the entity level margin of 19 comparable entities, which are engaged in the business of manufacturing packaging material. He submitted that although the TNMM was accepted by the TPO as the most appropriate method for benchmarking the international transactions of the assessee company with its AE involving export of manufactured goods, he took the profit margin of the assessee company from the relevant international transactions with its AE as worked out on the basis of segmental details as PLI and compared the same with the profit margin of the assessee company from domestic segment invo....
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....at although the TPO, as an alternative, made a transfer pricing analysis by comparing the exports made by the assessee to its AE with the exports made to the non-AE, he considered only the exports made by the assessee company to non-AE in Sudan, ignoring the fact brought out by the assessee to its notice that the type of material supplied to the non-AE in Sudan was different. He invited our attention to the copy of the submissions made before the TPO in this regard vide letter dated November 8, 2006 placed at pages 329 to 333 of the paper-book, to show that the material differences in the transactions involved in the exports to non-AE in Sudan and the exports made to AE were specifically brought to the notice of the TPO. He then invited our attention to the relevant portion of the TPO's order at page No.429 of the paper book to point out that although adjustment on account of freight charges and extra material consumed were allowed by the TPO, while making comparison between the price charged by the assessee company to non-AE in Sudan and price charged to the AE as claimed by the assessee, adjustment on account of commission was allowed by him only to the extent of 12.5% as against....
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....th and as rightly held by him, unreasonable or excessive commission cannot be considered while making the transfer pricing analysis. 20. We have considered the rival submissions and perused the relevant material available on record. It is observed that the TP adjustment in question was worked out by the TPO by comparing the international transactions of the assessee company with its AE involving export of manufactured goods with the sales of the manufactured goods made in domestic segment. Although the products sold/exported in these transactions were similar as pointed out by the Learned Departmental Representative, we find merit in the contention of the learned counsel for the assessee that keeping in view the material differences such as the quantum of export incentives, level of competition, corresponding freight cost involved etc., affecting substantially the profitability of export transactions vis-à-vis domestic transactions, it would not be fair and proper to compare the exports made by the assessee to its AE with the sales made by the assessee company to non-AEs in domestic segment, especially when specific instances of export of similar products to overseas Non-....
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....ed to AE. It is however, observed that these average prices are worked out by the assessee taking all the transactions entered into by the assessee during the year under consideration which is not proper. First of all, taking the average of the prices charged by the assessee to its non-AE in the relevant international transactions for the purpose of comparability analysis is not permitted under the Indian Transfer Pricing Rules. What the relevant provisions stipulate in this regard is that where more than one price is determined by the most appropriate method, the Arm's Length Price shall be taken to be the Arithmetic Mean of such prices and then such Arithmetic Mean being the average price is to be compared with the price charged by the assessee in the relevant international transactions with its AE. We therefore, set aside the impugned order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer/TPO with a direction to do the exercise of transfer pricing analysis afresh by comparing the average price (Arithmetic Mean) charged by the assessee company to its non-AEs other than in Sudan with the price charged by the assessee company to its AE....
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....T(A) on account of international transactions of the assessee company with its AE involving payment of agency commission, while the issue involved in Grounds No.5 and 5.1 of the assessee's appeal relates to disallowance of Rs. 2,70,424 made by the Assessing Officer and confirmed by the learned CIT(A) on account of payment of agency commission to M/s. Agabna Alaraby International Company Ltd.(AAICL). 25 During the year under consideration, the assessee company had paid Rs. 20,60,722 its AE, M/s. Signode System Gmbh, Germany as commission. In this regard, explanation offered in the TP report furnished by the assessee was that in the absence of any marketing executive/manager specifically appointed in Sudan, the supply orders from Sudan could be procured only because of market support from the AE. It was stated that a commission of US Dollars 50 per MT was paid to the AE for such active support, which amounted to a nominal 4% of the export order value. The assessee, however, expressed its inability to provide any comparable cases of commission paid for market support services. In this regard, it was found by the TPO that a further commission of 20.6% was paid by the assessee for pr....
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....d (GFTCL) was accepted by SGB and the order was placed on them. GFTCL entered into a contract with the assessee on 22/10/.2003 by which assessee agreed to supply the entire goods to SGB and also agreed to pay a commission of $ 200 per MT to GFTCL. It is mentioned in Article- 9 of the agreement dated 22/10/2003 with GFTCL that later acted as an agent of assessee company for procuring the said export order. The commission was paid for its services in procuring the order and closing the documentation. 9.4 The agreement with M/s. Agabna Alaraby International Company Ltd.(AAICL)was dated 22/10/2003 but signed on 6/03/2004 by AAICL. The agreement states that AAICL was appointed as the assessee's agent for supplies to SGB for one year effective from 22/10/2003. It further provided for payment of commission of $57.5 per MT against all sales made to SGB. AAICL was supposed to procure orders from SGB and to promote the sale of products of assessee. 9.5 The agreement with M/s. Signode Gmbh, filed by the Id. AR (page.110-111 of paper book) is undated and not signed by anyone on behalf of M/s. Signode Gmbh. In fact the document filed by the AR is an undated letter addressed to M/s. Si....
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.... by account payee cheques, is not a conclusive proof that any services were actually rendered by the commission agent who earned that commission. It has been held by the Hon'ble Supreme Court in the case of Laxmiratan Cotton Mills Co. (73 ITR 634) that the burden is on the assessee to prove that services were rendered by the commission agent. Again in the case of Laxminarayan Madanlal (86 ITR 439 it was held by the Hon'ble Supreme Court that the mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37(1) of the Act. Similarly, in another decision given in the case of Nund and Samont Co. Pvt. Ltd Vs CIT (78 ITR 268) by Hon'bl....
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....ee fails to place sufficient material, he is not entitled to claim this allowance under section 37(1) of the Act. In CIT Vs. Chandravilas Hotel (1987) 164 ITR 102 (Guj.), it is held that if the expenditure is doubted by the assessing authority, it is the duty of the assessee to prove by leading evidence that the expenditure was in fact, incurred". Reliance is also placed on the decisions in Vishnu Agencies (P.) Ltd. v. CIT [1979} 117 ITR 754 (Ca!), Ramdas Ramlal v. CIT [1983} 139 ITR 620(MP), 149 ITR256(Mad), Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [1985} 151 ITR 636(P&H) and decision of ITAT Hyderabad in the case of Smt. Pushpa Agarwal(ITA No. 110/Hyd/2005, order dated 30-09- 2005). The ratio of the above decisions makes it clear that the allowability of an expenditure depends not merely on an agreement between the assessee and another party and consequent payments made by the assessee, but on the evidence of specific services rendered by the payee resulting into benefit to the assessee, in absence of which the claim of expenditure cannot be allowed. 9.7. In view of the above discussion, I hold that the commission payments made to AAICL & M/s. Signode Gmbh were not allowab....
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...., the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of such commission payments is not sustainable. He also pointed out that the commission paid by the assessee company to both the parties concerned was quite fair and reasonable in the facts and circumstances of the case and the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on this count may be deleted. 29. The Learned Departmental Representative, on the other hand, strongly relied on the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on account of sales commission claimed to be paid by the assessee to its AE and other party. He took us through the relevant portion of the order of the learned CIT(A) and submitted that cogent and convincing reasons are given by the learned CIT(A) to come to the conclusion that the claim of the assessee was not established either on evidence or in the facts of the case. As regards the documentary evidence filed by the assessee in support of its claim for commission, the Learned Departmental Representative submitted that the same is only a self serving evidence in the form of....